SEC set to probe auditors’ fastest-growing businesses

When the two top executives of a hot electric-vehicle startup made share purchases that later drew scrutiny, they were helped by accounting firm BDO USA, according to the auto company. BDO was also the auditor of the company they ran.

The dual roles that BDO played at Electric Last Mile Solutions are typical of potential conflicts of interest faced by auditors. Relationships like this one are under scrutiny by the Securities and Exchange Commission, people close to the inquiry said.

The car maker said it took an internal probe to figure out that BDO was advising its chairman, Jason Luo, and chief executive officer James Taylor. Both executives resigned and their deals for company stock are being investigated by the SEC, the company said in March.

BDO is one of several midtier accounting firms caught in a sweeping probe by the SEC into conflicts of interest by auditorsone of the people close to the investigation said. The probe also includes the Big Four accounting firms Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers, The Wall Street Journal has previously reported.

A spokesman for BDO didn’t respond to requests for comment. BDO in filings rejected the company’s assertion that it had helped to “create and structure” the share transactions, but didn’t comment on whether it had advised the executives.

A spokesman for Electric Last Mile Solutions declined to comment, as did a spokeswoman for its former chairman Luo. Its former CEO Taylor didn’t respond to requests for comment. The SEC also didn’t respond to requests.

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Electric Last Mile said its investigation found the two executives bought its stock at “substantial discounts to market value” in the late 2020 run-up to the shares becoming publicly traded, via a special-purpose acquisitions company. It accused the two men of giving responses to the investigators that are “believed to be inconsistent with documents.”

BDO resigned as auditor of Electric Last Mile Solutions in February, citing concerns that an illegal act might have occurred. The company decided after its internal investigation that it needed to restate earlier financial statements that were audited by BDO, in the light of the share deals the accounting firm had allegedly advised on.

The SEC investigation reflects concerns about the increasing reliance by the big accounting firms on sales of consulting and tax services, which offer higher margins and greater growth potential than their core audit business.

The Big Four between them earned $115bn world-wide from consulting and tax services last year, more than double the $53bn from audits, according to data provider Monadnock Research. Between 2011 and 2021, the four firms grew their combined global revenues from consulting and tax work by 96%, far outstripping their 17% audit-fees increase over the same period, the Monadnock data show.

A Deloitte spokesman said the firm’s multidisciplinary approach “enables us to deliver high quality audits for the benefit of the investing public.” A PwC spokesman said “independence is core to the delivery of quality audits, at the heart of PwC’s culture and fundamental to everything we do.” Representatives of KPMG and EY declined to comment.

Accounting-industry group the Center for Audit Quality said that on average 90% of the total fees paid by an SEC-listed company to its auditor are for the audit or audit-related services. Most of the remaining fees went toward tax services.

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Concerns about poor audit quality underpin reforms under way in the UK. The Big Four firms there are splitting their audit operations from the rest of their activities, in response to demands by regulators. The measure follows a string of accounting scandals.

In the US, senior SEC officials have in recent months publicly warned accounting firms not to “creatively apply the [independence] rules,” and said sanctions may need to increase to deter rule breaking.

The agency’s ongoing conflicts-of-interest investigation is looking for breaches of rules banning accounting firms from selling specified services to audit clients, people close to the probe said.

Accounting firm RSM US was fined $950,000 in 2019 for selling services ranging from bookkeeping to lending staff during its work on more than 100 audits. RSM said when it settled the SEC charges, without admitting liability, that it was “committed to the highest standards of integrity and audit quality.” A spokeswoman declined to comment further.

The SEC investigators are also looking at situations where the audit firm sells nonaudit services that aren’t prohibited, such as certain tax services, the people close to the probe said. Even where there isn’t a specific ban, SEC rules impose an overarching requirement on auditors to be independent “in fact and in appearance.”

In a state-court lawsuit filed in Texas in June 2020, accounting firm Ryan accused EY of audit-independence violations, including auditing its own work related to tax services. Ryan says that EY performs oil and gas tax consulting similar to Ryan’s own services. EY later reviewed the tax work as part of its annual audit provision, Ryan’s lawsuit alleged, creating a conflict of interest that is prohibited under US law.

Ryan didn’t name specific EY clients in its lawsuit. The Texas firm alleged that EY’s auditors improperly obtained Ryan’s methodologies for calculating clients’ severance and royalty taxes, allowing EY to market competing services.

An EY spokesman said the firm strongly disputes Ryan’s claims and is vigorously contesting them in Harris County, Texas, court. The Big Four accounting firm has sought to have part of the case dismissed and is awaiting a state appeals court’s decision on that motion. The civil case is scheduled for trial in October.

Write to Jean Eaglesham at [email protected] and Dave Michaels at [email protected]

This article was published by the Wall Street Journal, a fellow Dow Jones Group title

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